Thursday, September 23, 2021

Evergrande -- redux of what?

I don't know much about Evergrande, but given the origin of this blog did want to share some speculation. First, their debt is denominated in dollars, so unlike Russia in 98, default may not be optional (Russia could have printed rubles if it wanted). CCP may have enough US$ to make good on Evergrande obligations, but whether they do so, and what they ask in return, is unclear. When put in the context of China's forex dollar holdings, Evergrande's obligations seem small.

Counterparties will take a haircut, write down their capital base, which could trigger a wave of defaults. At this point the structure of the counterparties matter -- who are they? To what degree do they lend? Will they require their counterparties to pay early, or cease to rollover credit? I don't know enough about the Chinese finance system, particularly at the municipal level, to predict. Fundamentally, who was buying dollar denominated debt issues by a chinese real estate developer?

Some counterparties I'm sure are foreign, particularly, US hedge funds. It would be rich if the CCP held this over them for concessions from the US regime. China Joe indeed.

Ultimately for China, the question is 1) at what point are obligations in renminbi, in which case the government has a LOT of options in how to manage it, with minimal impact to the Chinese economy, and 2) for purely dollar denominated obligations, will they run through their reserves vs force creditors to take a haircut. China is much bigger than Argentina.